Trade of the Day: Krispy Kreme Doughnuts (KKD)

Inexpensive calls on KKD increase your profit chances

On a cold winter day, there’s nothing better than some hot coffee and something sweet. Though you can get just that at Starbucks (NASDAQ:SBUX) or Wendy’s (NASDAQ:WEN), my Power Stocks system shows these restaurant sector stocks are temporarily leveling or pulling back. That’s not exactly going to sweeten your portfolio.

However, Krispy Kreme Doughnuts (NYSE:KKD) has confirmed its upward trend after a temporary pullback. A bounceback like that is one of the most reliable buy signals.

The uptrend in KKD signals a good entry point to take advantage of the momentum, but you can also use options to profit from that momentum without putting so much capital at stake.

Recommendation: Buy the KKD Feb. $10 call options at 50 cents or lower, when the stock Price is around $10.10. After entry, take profits if the stock price hits $11.00 or the option price reaches $1.20. Exit if the stock price closes below $9.60 or the option price falls to 30 cents.

This trade has a 15% probability of reaching the $1.20 profit goal. That may seem low, but 20% is about average for low-cost options. Plus, we calculate the probability that the option will hit its target price; the probability of returning a smaller profit is higher.

Also, our computers calculate probabilities assuming a random market. So a call option with a 20% probability really has a 40% probability in a bull market, and a zero percent chance in a bear market. The opposite is true for a put option. It has twice the probability of reaching its target price in a bear market, and a zero percent chance in a bull market.

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